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After threats of painful cuts, Detroit moves closer to deal to protect pensions

April 17, 2014 at 6:24 PM EST
When Detroit declared bankruptcy, the pensions of city workers faced deep pension cuts — some as high as 34 percent. After protests, these cuts have been scaled back and Detroit is drawing closer to a deal on how to protect against such drastic pension reductions. Judy Woodruff gets the story from Christy McDonald of Detroit Public Television.
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TRANSCRIPT

JUDY WOODRUFF: Nine months after it became the largest city in the U.S. to declare bankruptcy, Detroit is drawing closer to a deal on how to protect current and former city workers from deep pension cuts.

Until recently, officials had been warning of painfully large pension reductions. The shift was announced yesterday, and, today, leaders of the retired police and firefighters group voted in favor of it. Pensions for those retirees had faced a pension cut of up to 14 percent. Under the new deal, they wouldn’t take a cut. Other civilian workers faced a reduction that could have been as high as 34 percent. That’s been scaled back to 4.5 percent. Any action on pensions is being watched by other cities that confront huge debt.

And Christy McDonald of Detroit Public Television is here to fill in the picture.

Welcome back to the program.

Christy McDonald, am I right that there were these dire warnings up until just a day or so ago that pension cuts could be enormous?

CHRISTY MCDONALD, Detroit Public Television: Absolutely, Judy.

And that’s probably part of the negotiation process. You don’t come to the table first with your best deal. You have to start the negotiation. And those negotiations have been coming fast and furious ever since the city put its first plan of adjustment on the table about a month or so ago, which really is the road map of how Detroit is going to get itself out of bankruptcy.

And so there’s been a lot of back and forth, but there’s also been a lot of moving parts in different aspects to deal to try to offset those pension cuts. And it’s something called the grand bargain is what we’re calling it here in the city of Detroit.

What it is, is about $815 million that would help protect art at the DIA from being liquidated and sold to offset those pension cuts. Some of that money would come from foundations and also the Detroit Institute of Arts itself, but $350 million of that would also come from the state.

JUDY WOODRUFF: Now, what turned this around, because there was a serious concern that the retirees were going to take a big hit? What broke the dam?

CHRISTY MCDONALD: Well, when you take a look at this entire process, no one is going to be happy at the end of a bankruptcy process. No one is really going to win.

You know that the banks are going to take a severe haircut, but really the most vulnerable people of all in this entire process are those retirees, the people who worked for the city of Detroit and were promised a pension at the end of it, and it was actually protected by the state constitution.

Well, the bankruptcy judge said in the beginning — this is federal bankruptcy court — those pensions are going to be allowed to be touched. So, everyone knew and was looking at this pension issues and the retirees, knowing that some sort of special protection would have to come towards them. And so I think that you have people working at the state level.

You also have people who are eying the assets of the DIA because a lot of the valuable artworks are owned by the city of Detroit. And that is an asset that could possibly be liquidated. People wanted to protect that, but knowing that they wanted to protect retirees, some of whom are making an average of maybe $20,000 a year in that retirement.

JUDY WOODRUFF: So, clarify for us again — you just referred to this — who is going to make up the difference here? Where is the money coming from?

CHRISTY MCDONALD: A couple of different places, one, the state, $350 million. But that has to be approved by the state legislature.

And they have been watching this very carefully if they are going to approve this or not. They have been watching to see if the pension boards are going to give a little bit in this entire negotiation process, that $350 million.

We’re also going to be looking at foundations. Several powerful foundations have stepped forward with several hundred million dollars for this process. Also, the DIA has pledged that they will raise $100 million. And this is going to be over a span of about 20 years.

JUDY WOODRUFF: So, and, as we just reported, the police and fire union have voted to — in favor of this. So, does that mean that the retirees across the board are happy with this?

CHRISTY MCDONALD: It’s not a done deal yet.

But those boards, the pension boards, the general pension board and also police and fire, they have endorsed this deal. They have said to their rank and file, OK, I think this probably the best that we’re going to get.

But every retiree, they’re going to have to vote on this. And that voting process will start in May and will go until June. So, it’s not a done deal yet. But when you get to the endorsement of the boards who have been going back and forth in these negotiations that this might be the best deal that they are going to get, they are going to be listening to that.

But they’re not going to escape from this unscathed. Police and fire, they won’t get a cut, but their cost of living adjustment, that’s going to drop from about — just over 2 percent to 1 percent a year. And cost of living for the general retirement fund, they are not going to get one at all.

JUDY WOODRUFF: And, Christy, again, just remind us why there’s a difference between the cut the police and fire workers are going to take vs. all the other city employees?

CHRISTY MCDONALD: You have got — you have got two different pension boards. And so they managed their money a little differently.

Police and fire, they weren’t as aggressive. They were more moderate in their investments. The other pension fund, a little different. And they say that that pension fund, the general pension fund, has a shortfall of about $4.5 billion. The board disputes that number a little bit that the emergency manager came up with and said, no, we think it’s closer to $2.5 billion.

But, again, you are still looking at a huge amount of money there.

JUDY WOODRUFF: And, Christy, I just read — I guess it was on the wires a few minutes ago that the judge overseeing all of this said today that it’s essential that the city’s elected leaders commit to supporting whatever plan they finally come up with.

CHRISTY MCDONALD: Absolutely, because we’re going through this bankruptcy process.

And this is taking care of Detroit’s financials. But, really, what we’re looking at is, what is Detroit going to be like coming out of bankruptcy? How is the city going to be able to function?

And the person reason who is running this process, the emergency manager, Kevyn Orr, he could probably be gone. His term is going to be up, his 18-month term, in the fall. They’re hoping to get the city out of bankruptcy in October, but then you’re going to hand the reins back over to a mayor, city council.

They are the ones who are going to be making the financial decisions all over again. So, they want to make sure that they are on board, that they know what is going on and have that plan for coming back out again and endorse that plan, so then they can move and make sure that Detroit can be a thriving city once again and a growing city, because that’s really the goal here.

JUDY WOODRUFF: Christy McDonald with Detroit Public Television, thank you very much.

CHRISTY MCDONALD: Thanks, Judy.